Unbilled revenue and work in progress at period-end

Recognise income you have earned but not yet billed, support the estimate with time and job records, and value unfinished service work correctly.

A design agency finishes a website on 29 March and sends the invoice on 4 April. A maintenance contractor bills quarterly in arrears. An IT consultancy invoices on the 5th for last month’s hours. In each case the work, and the right to be paid for it, belongs to the earlier month, but the invoice does not. Unbilled revenue, also called accrued income, puts that income where it was earned so that one month is not starved and the next inflated.

At a company’s year end it matters more: turnover and profit in the statutory accounts must include income earned under FRS 102, whether or not an invoice has gone out.

Is it really earned?

Only accrue income for work the customer is obliged to pay for. Ask:

Income that has merely been agreed (a signed proposal for work starting next month) is not accrued. Money received before the work is done is the opposite case, deferred income, explained in deferred income and revenue recognition.

Estimating the amount

Build the figure from operating records, not from memory:

Keep a short schedule per customer showing the basis, the figure and the expected invoice date.

Journal and reversal

An IT consultancy has 64 approved hours for a client in October at £95 an hour, to be invoiced on 5 November: £6,080.

31 October, flagged to reverse on 1 November:

Account Debit Credit
Accrued income £6,080
Consultancy income £6,080

On 1 November the reversal removes the £6,080 from November’s income. On 5 November the real invoice posts £6,080 of income plus VAT to the customer’s account. October shows the income; November nets to nil for it. Reversals and the double-counting traps are covered in reversing journals after month end.

In the balance sheet, accrued income is a current asset reported within debtors, under prepayments and accrued income in the Companies Act formats.

What about VAT?

The accrual journal carries no VAT, because it is not a supply document. But do not assume VAT can wait for the invoice. For a one-off service, the basic tax point is when the service is completed; an invoice issued within 14 days of that usually becomes the tax point instead. If you complete a job and leave it unbilled for longer, the completion date can already be the tax point, and the VAT belongs on that return. The rules are explained in VAT on advance payments and tax points. Continuous services billed periodically follow different rules, generally the earlier of invoice and payment.

Evidence to keep

For every accrued income line, the year-end file should be able to answer “how do you know?”:

When the post-period invoice differs from the accrual by more than a little, investigate: either the estimate method needs improving, or some of the work was not chargeable after all.

Work in progress in service businesses

Unfinished jobs at the period end raise a slightly different question. A surveyor half-way through a valuation report, an accountancy firm with year-end jobs in progress, or a builder part-way through a fixed-price refurbishment all have work in progress: time and costs spent on work that is not complete and not yet billed.

There are two ways the numbers can appear, and the contract decides which applies:

For both, track on each job the hours spent at cost rate, direct expenses, the agreed fee and an honest estimate of the percentage complete. Value by staff cost (salary plus employer on-costs), not by charge-out rate, when carrying work at cost. Review the list for jobs that have stalled; work the customer will never pay for has no value.

In the nominal ledger, keep service WIP in its own current asset account (separate from manufacturing stock and from accrued income), and present it within stocks or debtors consistently from year to year. Because WIP and accrued income both change taxable profit, your accountant will want the job list and the basis behind it in the year-end pack.

If your timesheets and invoices already live in one system, the unbilled figure is a report rather than a spreadsheet; that is one of the things worth checking in a Nexbal trial.

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